CIS for builders: 20% and 30% deductions and how to avoid overpaying

The Construction Industry Scheme (CIS) is a special HMRC tax arrangement for the building trade. Under it, the business paying for the work (the contractor) deducts part of the payment from the worker (the subcontractor) and sends it straight to the tax office as an advance on Income Tax and National Insurance. Here is who it affects, the deduction rates and how to avoid overpaying.

Who is a contractor and a subcontractor?

A contractor is anyone who pays others for construction work. A subcontractor is the person who does that work. The same person or firm can be both at once — in which case you must register as both. Businesses outside construction are also caught by CIS if they have spent more than £3 million on construction work over the 12 months since their first payment.

What are the deductions?

If a subcontractor is registered with CIS, the contractor deducts 20% from the payment for labour. If the subcontractor is not registered, the deduction is higher — 30%. This money counts towards your future tax and National Insurance, but it is taken out of your cash flow until the year end, so registering directly saves money and eases your cash flow.

Can you be paid without deductions?

Yes. You can apply for gross payment status — then the contractor pays the full amount with no deductions and you work out and pay your own tax at the year end. To get it, your business must meet HMRC's tests on turnover and a good record of paying tax on time. It suits firms with large turnover and expensive materials.

What must the contractor do?

A contractor must register for CIS, verify each subcontractor's status with HMRC, deduct the correct rate and file a monthly return of payments. There are penalties for missing returns and for wrong deductions, so records must be kept carefully.

How does a subcontractor register?

Registration is free and done online with HMRC; you will need a Unique Taxpayer Reference (UTR) and a Government Gateway account. Once registered, contractors deduct 20% instead of 30%. Any tax over-deducted is refunded or set off after you file your annual return, so keep every payment and deduction statement that the contractor must give you.

Which work is covered by CIS?

Most construction work is covered: site preparation, demolition, building, alterations, repairs and decorating, installing heating, lighting, power, water and ventilation, and cleaning interiors after construction. Not covered are: architecture and surveying, scaffolding hire with no labour, carpet fitting, making and delivering materials, and non-construction work on site such as running a canteen. The rules also apply to overseas firms doing construction work in the UK.